There are different means of combating inequality, including progressive taxation and raising unemployment benefits. But as soon as someone proposes a solution to the problem, he is immediately dubbed a populist.

This fate has befallen Alexei Navalny. In his presidential election program, he proposed setting a minimum wage of 25,000 rubles a month [approx. 400 euros at current exchange rates].

Is This Populism?
Let’s see how the structure of Russia’s GDP would change if this measure were implemented under current macroeconomic parameters. And let’s compare Russia’s GDP with the GDPs of the G20 countries.

GDP is the market value of all goods sold and services rendered in the country during the year. Costs are always someone’s income, so GDP can be calculated not only in terms of consumption, investment, government expenditures, and net exports but also in terms of income.

STRUCTURE OF RUSSIAN GDP IN TERMS OF INCOME IN % (PER ROSSTAT)

2015

2016

2017

GROSS DOMESTIC PRODUCT

100.0

100.0

100.0

Compensation of employees, including wages and mixed income not captured by direct statistical methods

47.2

45.0

46.6

Net taxes on manufacturing and imports

13.9

11.1

10.7

Gross economic profit and gross mixed income

38.9

43.9

42.7

There are three types of income:

Compensation of employees, includes expenditures on insurance and pensions.

Net taxes on production and imports. Essentially, this is revenue from the extraction of natural resources and their subsequent import abroad.

Business income: company profits, capital gains, incomes of individual entrepreneurs.

The table shows that business income is nearly equal to the income of all employees.

Indirect taxes (e.g., income tax and VAT) are not included in GDP in order to avoid duplication, since they are based on the same profits and wages.

This is what average income distribution looks like in the G20 countries:

The labor share in Russia is 6–7% lower than the average for the G20 countries. The reason for the difference is the weakness of democracy and civic institutions in Russia. Election results do not depend on the opinion of the populace, trade unions are weak, and protests against social policy are far and few between. So it makes no sense to redistribute incomes to benefit employees.

How Much Would We Spend?
72,323,000 people are employed in Russia. We have to subtract entrepreneurs [i.e., the self-employed] from this figure. According to the Unified State Register of Individual Entrepreneurs (EGRIP), they amount to approximately 3.5 million people. We also have to subtract those people who work part-time: according to Rosstat, there are around one million such people, if we discount those involved in small business. So the upper limit of full-time employees in Russia is 67,820,000 people. Within this group, 50.3% earn less than 25,000 rubles a month.

However, 1.4% of employees earn between 5,000 and 5,000 rubles a month, and 20.9%, between 17,000 and 25,000 rubles a month. Another 50 percent of employees receive an average monthly wage of 15,329 rubles [approx. 240 euros].

Accordingly, the poorest wage earners would benefit most of all from the introduction of a mandatory minimum wage. On average, every employee currently earning less than 25,000 rubles a month would be paid an additional 9,671 rubles (i.e., 25,000 rubles – 15,329 rubles = 9,671 rubles ).

We would thus have to reallocate almost 3.96 trillion rubles annually: 9,671 rubles (the average pay rise) x 67,820,000 (the number of employees) x 50.3% (the share of those currently earning less than 25,000 rubles a month) x 12 (months) ≈ 3.96 trillion rubles.

Let us add in insurance premiums and pension contributions, which amount to 30.2%. The overall total would be around 5.15 trillion rubles (3.96 trillion x 1.302).

Russia’s GDP in 2015 was 83.23 trillion rubles. If we reallocate 5.15 trillion rubles from profits to wages, we arrive at the following ratio.

2015

2015 (%)

2015*

2015* (%)

GROSS DOMESTIC PRODUCT

83.233 trillion rubles

100

82.233 rubles

100

Compensation of employees

37.471 trillion rubles

45

42.621 trillion rubles

51

Net taxes on manufacturing and imports

9.272 trillion rubles

11

9.272 trillion rubles

11

Gross economic profit and gross mixed income

36.489 trillion rubles

44

31.339 trillion rubles

38

In the resulting structure, the share of labor income is slightly higher than the average figure among the G20 countries.

Obviously, many people would lose their jobs after a minimum wage of this kind was introduced, primarily those people who dig pits with a shovel where an excavator should be doing the work. These jobs are safe nowadays only because you can pay people almost nothing in Russia.

In turn, employers would seek to maintain profits by increasing prices for finished products. In aggregate, these effects would shape an economy typical of developed countries.

What Do We Risk?
Many people fear inflation. Let’s evaluate the risks. To introduce a mandatory minimum wage of 25,000 rubles a month, according to the structure indicated above, we would have to increase wage costs by 13.7%. The share of labor costs in the economy is 45%. Accordingly, to cover the increased costs, the price of finished products would have to be increased by 6.165% (13.7% x 45% = 6.165%). That would be the upper limit of possible inflation.

In reality, however, a rise in prices decreases consumption and forces prices to creep downwards. In addition, unemployment and inflation are inversely proportional to one another, meaning the higher the unemployment rate, the lower the rate of inflation.

Additional inflation would be two or three percent, and for the most part it would be spread out over the whole of society, meaning that people who earn a lot would forfeit this percentage of income, while the incomes of the poorest workers would increase significantly.

Of course, such a drastic rise in wages is a rather radical measure, given that the minimum wage is currently even below the subsistence level, and it is bound up with a variety of social benefits that would also automatically increase. But the tenor of the reform is absolutely correct and corresponds to successful examples in world practice.

The introduction of a statutory minimum wages in Germany has lead neither to inflation nor unemployment. In the US, increases in the minimum wage have increased the salaries of low-paid workers while maintaining employment.

Translated by the Russian Reader. Thanks to Alexei Gaskarov for the heads-up. For another take on the Russian economy’s performance and the figures provided by Rosstat, see yesterday’s featured post, “Lies, Damned Lies, and Statistics,” a translation of an op-ed piece by liberal economist Sergei Aleksashenko.